Athenahealth's CEO Presents at Citi 2013 Global Healthcare Conference (Transcript)

| About: athenahealth, Inc. (ATHN)

athenahealth, Inc. (NASDAQ:ATHN)

Citi 2013 Global Healthcare Conference

February 26, 2013 9:35 am ET

Executives

Edward Y. Park - Chief Operating Officer and Executive Vice President

Dana Quattrochi - Director of Investor Relations

Jonathan Bush - Co-Founder, Executive Chairman, Chief Executive Officer and President

Analysts

George Hill - Citigroup Inc, Research Division

George Hill - Citigroup Inc, Research Division

George Hill. I'm a health care technology analyst at Citigroup. Very happy to have with me this morning Ed Park, Chief Operating Officer of athenahealth; and Dana Quattrochi, Head of IR at athenahealth, where we get to learn more about one of the leading companies in the health care technology space. Good morning.

Edward Y. Park

Good morning.

Dana Quattrochi

Good morning.

Question-and-Answer Session

George Hill - Citigroup Inc, Research Division

We had dinner last night. We had a lot of free conversation...

Edward Y. Park

And a very large steak.

George Hill - Citigroup Inc, Research Division

And a very large steak, Flintstone size. One of the topics that we started to get into last night and is a huge topic for all the technology providers going forward, we can see that you could probably talk for an hour about this, is that one of the company's strategic initiatives is to equip caregivers with what we call to win in the global risk market, and I kind of take that right out of Jonathan's quote from the Q4 call. I guess, can you talk more about this initiative, and how is the company benchmarking its success?

Edward Y. Park

I think the first thing to take a look at is, what does global risk mean. I think for those of you that don't know, I mean, I think -- the current -- everyone knows that the current system is a fee-for-service and volume basis, and that's how providers fundamentally get reimbursed today. The difference with global risk is that under global risk, you're paid a -- it's at the extreme other end of the spectrum. It's where you're paid a fixed sum per patient per month to -- for all services you rendered, basically, return of capitation, with a couple of added kickers in there. You actually have to also have certain quality measures set -- thresholds met and certain patient satisfaction thresholds met in order to qualify for being paid under global risk. But fundamentally, there's a spectrum between fee for service and global risk that exist out there. And the pendulum has been swinging towards global risk for the last 10 years. So it's actually not something new. It's not something that is, I think, catching anyone by surprise. I think the question is basically how quickly will we get there. Now along the way, you have a bunch of things like PQRS and various fee for fee [ph] programs. But I think that, that we're -- we actually have been positioned for global risk for some time. The first question I basically ask or the first thing I would basically say is what does it -- what do we think is a necessary prerequisite to succeed under global risk. And I think that's a necessary prerequisite for success in our global risk is actually what we call the high-performance side of the group. And the reason for that is that under a global risk arrangement, where you're basically paid a fixed sum per member per month to take care of a population of patients, the hospital shifts from being a revenue center to being a cost center, right? So under a fee-for-service environment, you're actually paid for every admission to the hospital. Under a global risk environment, you're actually paid to not send the patient to the hospital. You actually want to carve out those costs. The way that you actually make sure the patients don't make it to the hospital is you actually take care of your population of patients. So what that actually requires is it requires a high-performance medical group. So what we're actually beginning to see is the pendulum beginning to shift from the facility-centric systems to ambulatory environments. If you look at the 259 Medicare shared savings ACOs that were just approved over the course of the past couple of years, half of them don't have a hospital in them, and they actually have structural advantages. And so I think the first thing I would basically say about the way we've been preparing for the move to global risk is that the athenahealth -- Athena basically provides a control structure for -- for actually moving -- for training high-performance medical groups and actually helping us move there. And so that's sort of piece one. The second piece, I think, is we recently acquired a company called HDS, which it turns out that no matter who you are, the number of biospheres that exist in which you actually have full visibility in your patient population is not large. You actually need to have a 360 degree view of patients that includes payer data. So you actually need, under global risk, to get all the claims from the payer and stick them into a giant database so you can actually look for gaps in care. And with HDS, we're able to do that, and we're actually able to manage in -- it's essentially a population management tool that allows us to look at the global risk environment. The combination of HDS, which actually gives us perfect insight into a population along with our control mechanism, which is basically athenaClinicals and athenaCollector, equals a tremendous amount of value. The mistake, I think, that many people are continuously making in this space is that they're overly focused on analytics and overly focused on inpatient. So it turns out that if you focus on inpatient, you can't keep people out of inpatient and therefore, that's sort of a losing proposition. If you're overly focused on analytics, one of the -- I don't know how many folks here are actually [indiscernible] in this disease management space and the bubble that occurred in 2000, 2007. But basically, that was a story where I had a bunch of friends who are executives in those companies and they basically said they spent all their time in analytics and not enough time on action. It turns out that perfect insight times 0 action equals 0 value. And so they basically would have spent a lot more money actually getting stuff done as opposed to doing the insight. So HDS does the insight. athenaClinicals actually gives us the ability to action that at the point of care, while the providers in the workflow. And that, I think, will allow us to win at the global risk game.

George Hill - Citigroup Inc, Research Division

As an analyst, I like a good, simple formula like that. I guess, can you talk -- maybe just take a minute to specifically in very layman's terms what does the HDS acquisition from a functionality perspective enable a physician to see and enable a physician to do. So insight times action.

Edward Y. Park

Insight times action. There are 2 critical things that -- there are 2 critical levers that you need in that, that you need to focus on when managing a global risk contract. Lever number one is you have to -- if you look at the way the Medicare shared savings contracts are written or any of the shared savings contracts that are written, you have to meet certain quality gates. So you actually have to do population management. In the case of the Medicare shared savings, there are 35 key core measures that you have to follow, that are basic preventative guidelines that represent the quality of clinical care. The second thing you have to take a very close look at is managing the leakage and referral patterns of your population, where are your patients going and how are they actually moving through things. When you go through a risk contract, if you sign the Medicare risk contract where you sign one of the contracts that [indiscernible], the first thing that the payer does is that for all the attributed lives, so for example, if there are 10,000 Medicare lives in your population, the payer has to give you all of the historical claims for a couple of years back for all of those patients and give you a monthly update for all those patients throughout the year. So the first thing that you need to do functionally with the system is ingest that claims fee, which forms a basic foundational mechanism for understanding what's going on with your population patients, where are they going, what's being done to them, how severe is it, et cetera. And so HDS, the first thing it allows you to do is ingest all the information and make sense of it. So it's basically an analytics platform that allows you to do that. The second thing it allows you to do is also ingest secondary and tertiary data sources, including the EHR data, lab data, pharmacy data from other different sources and basically plug all the different holes in that.

George Hill - Citigroup Inc, Research Division

I guess I want to stop and ask you a question where, with respect to the data dump that you get, do you feel like the data dump, combined with HDS as a provider, do I get a, I'll call it, a good longitudinal view of the patient the first time that I see them? Or I guess, it's a very qualitative question, but how would you qualify what I see with the data dump that goes into HDS? I get kind of look at it, spit out of it. As the provider, what do I see?

Edward Y. Park

You see now probably the best longitudinal view of the patient that you've ever seen because you actually know what happened to the patient and where it happened to them. So it gives you a -- for those patients that the payer gives you data for, understanding where the patient, what happened to them is a really good proxy for the clinical record. The other thing that HDS does though is that to the extent that someone needs a -- for example, a diabetic needs a foot check or -- it also allow -- it also gives a lightweight portal into the -- to every provider in the network to allow them to see gaps in care and actually allow them to manage the gaps in care. So that was the other thing that they had the timing to do. So they ended up building a really broad and thin layer that allows them to take data from anywhere and allows providers to basically go in there and figure out what's happening with their patients and how to manage them.

George Hill - Citigroup Inc, Research Division

And I'll ask you one more qualitative question about HDS which is, so now that I know that as a doctor, I'm getting a good longitudinal record of the patient, a good longitudinal look at the patient that comes to me. How clean or how scrubbed from a presentation perspective -- as a provider, am I getting what looks like a longitudinal view of the patient that's easily digestible? Or am I getting an ugly scrub data dump that's coming from a payer organization that I then have -- I'm asking what is -- how far has HDS come with scrubbing the data set so that as a provider, it looks to me like it's something clean and is usable?

Edward Y. Park

So the provider, what they actually care about most is having actionable specific themes that they need to do for that population of patients. So it's actually a little less about the clinical record. While you can basically see the clinical history, most doctors don't actually want to know the entire clinical history of their patients. They are trying to get to as many patients as they can a day. And so for them to basically sit down and read a treatise on a particular patient is basically too much work for them. It's actually a little bit of a misconception that providers really want to have the entire clinical history. What they do want, though, is they want to know the 3 or 4 things that they need to do for the patient who's coming in tomorrow, who they have to reach out to in order to basically get their bonus money at the end of the day. It's a very, very, very driven by the bonus element of what they do. And so that piece is actually incredibly boiled and scrubbed down to something that's very clean.

George Hill - Citigroup Inc, Research Division

Okay. That's great color on HDS. Switch gears a little bit. One of the topics that came up also, again, on the most recent quarterly call is the growth of Coordinator Core and the growth of Coordinator Plus, where both products are on pretty rapid growth trajectories. Can you give investors a brief overview in the difference between Core and Plus and talk about what adoption of Plus is looking like? As I see now that it's starting to make what I would consider a meaningful revenue contribution even if it's not GAAP materiality, but it's now a measurable contribution to the company's revenue.

Edward Y. Park

So just one line on the philosophy of Coordinator, and then we'll get into, I think, some of the details. The philosophy of Coordinator, we believe that health care -- there should be an open market exchange for information in health care; that basically, patient data should be liquid and that it should be able to hop from point to point to point to point. The problem with most HIE models is that they were fundamentally broken. There's no revenue model. There's no one -- there's no way that they actually generated revenue. And therefore, we ended up getting an opinion from the Office of the Inspector General to allow for a new kind of way in which to pay for the health care transaction and that we -- and we call that athenaCoordinator. It's basically a closed-loop order management service between an ordering provider and a supplier in the supply chain. The right way to think about the economics of Coordinator is very, very similar to the economics of a -- and for those of you who remember, actual landline phones, toll-free numbers. So in today's world, for the most part, it's just like in the olden days of long-distance telephone calls where basically, the calling provider always has to pay. So even though 50% of orders actually get dropped from the provider, it's actually on the ordering provider to make sure that every lab, every radiology test, every consult actually ends up being -- coming back in a closed loop. And whereas most of the time, the receiver actually gets a lot of benefit from that because they get the volume and they get the clean data and they -- so both sides would benefit from the exchange of information, but neither side is actually working. So they greased those skids a little bit, the opinion that we got from the Office of the Inspector General basically said that the receiver was more or less allowed to behave like an 800 number.

Edward Y. Park

I liked your collect call example.

Jonathan Bush

Or the collect call. A collect call, right, where basically the receiver was allowed to pay for the call. And therefore, the ordering provider doesn't have to actually bear the entire economics of that roundtrip order management piece of it. So that's the way that the economics of it work, and at the end of the day, what happens is that the ordering provider ends up paying less and the receiving provider gets the volume and gets clean orders in the door. So that's the core service that Coordinator is. There are 2 versions of Coordinator. There's Core, which is essentially the basic order management service; and Coordinator Plus, which adds on top of that basic order management service some heavier service -- heavier touch-point services like credentials -- like precertification and pre-authorization. In terms of how they're working in the market, the full idea behind these things, and we never had any, I think, any allusions that the creation of a 2 sided market was going to be an overnight exercise. That -- the idea was to, first of all, get the idea out there and begin to see the 2 sided market, basically giving a fax machine to a lot of people. It's useful with n squared, right, the number of people who end up having it. So right now, we have a relatively low end. But the interesting thing is that it actually gets us in the door of interesting conversations. People actually get it, and they are betting on the come. So we're in the process of seating both the sender side and the receiver side, and we have over 1,000 senders and receivers out there and it's beginning to work.

George Hill - Citigroup Inc, Research Division

We talked a little bit about this at dinner last night. It seems like the area -- the way that it makes sense to spread Coordinator Plus, I call it the NFL cities approach. You want concentration of senders and receivers to build the local regional networks that use Plus, and then you'll connect the networks to the networks.

Edward Y. Park

Yes.

George Hill - Citigroup Inc, Research Division

I guess can you talk about how the company drives that initiative?

Edward Y. Park

We picked a couple of key areas to start focusing in on, and we call them algae bloom cities because when you think about the analogy I want to have, it's that scenario -- I don't know if you got this math problem from high school, but it's like if an algae cell basically divides every day and at 30 days, it's actually the entire pond is filled with algae. At what point was it actually half filled with algae? Well, the answer is like 29. And it's because it takes a long time to actually have any visible change. But at the end of it, you see a huge amount of change, right? And so we're in the process of trying to basically see the algae blooms in a number of major NFL cities at this point. And actually more so interestingly, the NFL cities are actually kind of -- it may actually work better in secondary markets, again, in NFL cities because the politics of the order exchange are actually simpler. So we're in the process of doing that and we should see results soon.

George Hill - Citigroup Inc, Research Division

Okay. Maybe we'll call it the NBA cities, Oklahoma City.

Edward Y. Park

Oklahoma City, NBA cities or hockey cities, divisions [indiscernible].

George Hill - Citigroup Inc, Research Division

Hockey cities. So -- and I guess, this question might seem a little duplicative, that the orders-based demand around Coordinator, can you talk a little bit about the order-based demand and the pricing for Clinicals? And I guess, what has the demand look like for orders-based pricing for the Clinicals product separate from the Coordinator product?

Edward Y. Park

So the idea for orders-based pricing for the Clinicals product, and this actually does take a little time for folks to get their heads around. But again, I think that the idea is as opposed to a situation in which you charge x dollars for Clinicals, orders-based pricing is a scenario where you're going to a doctor and you basically say, "Well, how about you basically pay y dollars plus $1 an order up to a count, right?" And we've asked this with every clinical client that we sold since Q2 -- Q1, Q2 of last year on order-based pricing because they actually believe it and see the benefit of it down the line. I think that we're waiting on repapering all of our existing clients on it because it isn't a net economic benefit until there are more receivers in the market. And so it's -- someone has to pay for one way or the other. Right now they're basically paying for all. The centers are paying for all of it. As we get more receivers on the line, the receivers will start paying for more of it and we'll sort of begin to see the viral effects begin to happen.

George Hill - Citigroup Inc, Research Division

And then maybe I'll step back and this one wasn't on the questions list, but if I continue to think about the evolution of the phone analogies that we're using, we've kind of seen that whole market go full circle from expensive upfront costs to permanent charges, to permanent charges fell to just about 0 to back to bundled charges. If you think about your business over the long term, would you expect that we might see a -- and now I'm thinking in like 20-year cycles, right, we're going to go from 4% of collections to $1 a transaction to transaction prices across the industry are going to fall to the point where you're going to go back to rebundled pricing, would you expect that to be a normal, I don't know, like a 20- or 30-year cycle probably in the life of your business, not a 5-year event?

Edward Y. Park

It will be a while. I mean, if we have that problem I would be delighted. I think fundamentally, our perspective right now is that clinical interop and exchange is such a loaded term in the industry these days, that it tends to crowd out the things that actually matters, like does the product that you put in the office actually make money for physicians? Is it actually a good product clinically? Does the revenue cycle product actually net more money for physicians at the end of the day? Can you actually manage against global risk contract? But everyone is -- the industry has currently has a mental block on interoperability. And I think that's to the extent that we get to the point where all data is considered to be liquid. In the same way that everyone has email today, right? Or you can use Outlook or you can use Gmail or you can use Yahoo! Mail. And no one expects that everyone has to be on the same mail client in order to talk to each other. I think we're going to get there with clinical information, but we're not there yet. Once we get there and once it's essentially free to send that stuff, I think that's going to be a good situation for everybody.

George Hill - Citigroup Inc, Research Division

Okay. Maybe jump in to some micro stuff for a second. On the third quarter earnings call, the company talked about a slowdown or a pause in the ambulatory market as you saw providers decide whether or not they should affiliate with hospital systems, how the ACO market was going to shake out, what was going to happen with health care reform. By the time that we got to the end of the fourth quarter, the discussion of this pause seemed to have gone away. I guess, can you talk a little bit about what the company saw during that time period? Do you have any opinions on what led to the resolution? And I guess, how do you feel about the near to medium term going forward with respect to the macro physician decision-making environment?

Edward Y. Park

I'll start by saying that we remain bullish on the -- on everything that we're doing. I think that the health care market does remain fickle. I think that there was a slowdown period between Stage 1 Meaningful Use and what we're calling health care armageddon again, which is coming in 2014. The government in its infinite wisdom decided to make IPV-10 and Meaningful Use stage 2 hit in the same year, which is going to be an enormous amount of changed management to come down, and so I think that -- but there was a little bit of a lull here, in which most of the first -- the early movers ended up already buying IP systems and -- or health IP systems and are moving through. So I thought we saw a little bit of it there. We also saw a little bit, in the way of groups who were still indecisive about whether they were going to sell at the hospital system, so there's a little bit of that -- and frankly there was a little bit, with the election, they thought well, if someone new is going to come to office and actually reverse all of the legislation, they wanted to have, at least, some stability as to what was going to happen with health care because it was actually one of the key points during the presidential debates. With all that said, I think, that Q4 resulted in that and actually Q3 is always a seasonally slowdown period. Q4 is always a -- has always historically been a bit lumpy. If you basically net out a couple of the smaller business we have, our core business grew in the 90s in terms of where our bookings were over the last year, and we're good with it. I mean, I think, we'll continue to -- there will continue to be uncertainty in the market going forward, and the market will remain fickle, but we intend to keep a pulse on it.

George Hill - Citigroup Inc, Research Division

Okay, switch gears again, and talk about what are the pieces of the company's big news recently is the Epocrates. Big smile, I like that. How should we think about how important physician engagement is with the Epocrates product to the success of the transaction from Athena's perspective?

Edward Y. Park

Yes, I think that the most important thing about Epocrates is the level of trust that physicians have in it, trust and awareness. So athena's biggest problem today, I think, it's top problem is actually awareness. We have the best clinicals product that no one has ever heard of. In the most recent class reports we have, the top-ranked at EHR for small groups,and we're #2 in the 11 to 75 segment. So we're doing really, really, really well in those segments. But no one has actually ever heard of us, whereas everyone has actually heard of Epocrates, the -- and so the #1 thing that we are looking at Epocrates for is awareness. A way to -- and I would actually add awareness and an injection of clinical awareness, trusted clinical awareness. The thing that the -- both Epocrates and athena have in common, which is the reason that we ended up buying them is that we are both rabidly on the side of the physicians and of the medical groups. There are a lot of players there out in health care, and I actually think that every player has to end up taking a side of some kind, and we have declared ourselves to be unabashedly in the corner of the physician. We want to basically be the physician helper and do everything we can to make sure that they are supported and get their fair share of anything that's coming down the pipe. So in terms of awareness, I think that Epocrates is the preeminent brand -- one of the preeminent brands in health care. It has a favorable net-net promoter score that's on par with Apple. I think that physicians use it -- they're basically -- there are 350,000 -- there are a million users, 350,000 physicians, about half of all practicing physicians in the U.S., 50% of them use it on a daily basis, 80% use it on a weekly basis and 96% of them have reported using it to actually change one of their clinical decisions in the past year. So we actually think it is a perfect platform for awareness. And our goal is to begin to take the Epocrates platform, which is a mile-wide and inch deep, and to fuse it to the Athena platform, which is an inch wide and a mile deep. And we think there's a lot of white space in the interstitial areas to create a lot of hay.

George Hill - Citigroup Inc, Research Division

Okay. Switch gears one more time and talk about one of my favorite whipping posts, which is the inpatient market and the inpatient systems market. I love the inpatient market for technology vendors. How important is it to Athena to develop an inpatient product and an inpatient strategy? And as I joked last night, when will you launch your inpatient product and rightfully assume your place among the leading inpatient systems vendors in the health care technology?

Edward Y. Park

Someday. I think that the way we think about the inpatient market, I mean if you go back to the risk conversation, the pendulum is swinging back towards the high-performance medical group. The reason that athena has been so successful to date in enterprises is that most enterprises that are thinking rationally about it realized that they need to create high-performance medical groups and that the inpatient -- as inpatient basically shifts from being a revenue center to a cost center, is investing more in it doesn't necessarily make sense. The reason that Athena is actually considered to be the safe choice among for profit national hospital chains at this point, it's considered to be an increasingly safe choice because we actually allow them to create high-performance medical groups. So from a secularly trend basis, we really like where we sit right now. The fact that we have always been on the side of the physicians, it's actually in our DNA, we're not trying to switch ourselves out and that as the world moves from fee for service to global risk, that gives, I think, additional credence to what we do, and that's helps your move from not for profit to for profit. Those are all net tailwinds for us. And so we're really happy about that direction. We think that the advantage of interoperability for inpatient is going to be also a net tailwind for us, as people begin to be less afraid that the [indiscernible] systems and inpatient systems can interoperate, which is going to continue to happen over the course of the next 2, 3 years. I think that, that's always going to be a net tailwind for us. And so at a high level, we think that inpatient is actually not critical to the growth. With that said, someday.

George Hill - Citigroup Inc, Research Division

How far do you think we are away from this data liquidity that we talk about? How far away are we from when MGH with its Epic deployment can share clinical data seamlessly with Steward, which runs Athena, which can share their clinical data with Boston Children's which [indiscernible]?

Edward Y. Park

3 years. 3 years. I think that it's going to happen faster than most folks expect. And the reason I'm so bullish about it is because it's actually wired into Stage 2 Meaningful Use. And Stage 2 Meaningful Use, you actually -- it was actually one of the most controversial measures in Stage 2 Meaningful Use, that a substantial numbers of your transition of care -- it's not -- Stage 2 Meaningful Use says not only do your systems have to be capable of sending electronic transitions of care, you actually have to do it for a certain percentage of your population and a number of providers...

George Hill - Citigroup Inc, Research Division

Health care exchange is the verb, not health care exchange is the noun.

Edward Y. Park

Health care exchange is the verb. It actually has to happen. You actually have to prove that it happened. And so the fact that, that is going to happen, and that's actually wired in Stage 2 Meaningful Use, and we're going to basically see everyone begin to shift into Stage 2 Meaningful Use over the course of the next 1 to 3 years is, I think, going to create a significant change in the way that people perceive data liquidity. There are going to be a bunch of bumps along the road, but it's going to happen.

George Hill - Citigroup Inc, Research Division

Okay. At the 7-minute mark, I would like to stop and see if there are any questions from the audience before I continue. What I will do is I'll pause for a second and...

Unknown Analyst

I don't know how much the rest of the group here understands your business, but I'm new to your company. With $400 million in revenues, how many clients do you have and what is the revenue per client? And How much of that revenue is recurring versus not? Can you just go into the basics of who you are and what you do?

Edward Y. Park

Dana?

Dana Quattrochi

Sure so we actually don't report the number of clients. We do have 28,000 physicians, about 40,000 providers on kind of our main product, which is athenaCollector, which is revenue cycle. We look at our market share as about 650,000 physicians in the U.S. And if you take that 28,000, divide it into 650,000, we have about 4% of the market share today.

Unknown Analyst

That's not what I'm asking though. I'm asking you if you look at your customers today, what are you collecting per customer approximately?

Dana Quattrochi

We collect on average about $20,000 if they are full-time physicians.

Unknown Analyst

And how much of that is under contract, recurrable, not recoverable?

Dana Quattrochi

Everything -- pretty much 100% of our revenue is recurring revenue.

Edward Y. Park

It's all -- we're a pure SaaS business model. We have been from the beginning. We have one copy of our software in existence. The revenue model is -- we charge percent of collections for all of our business, and it's ranging anywhere from 4% to 7%, something like that. And it's roughly -- you can do the math, with $400 million in revenue and roughly 40,000 providers, roughly 10,000 per provider per year. There's a bunch of full-time, part-time folks in there, but that's roughly what it is.

Unknown Analyst

2 billion in change in collections?

Edward Y. Park

Yes, about 2 billion in change -- when we got to the 1 billion-mark, that was sweet -- but the attrition rate is less than 5% a year. And so it's just, it's the gift that keeps on giving.

Unknown Analyst

I probably should have warned that when Ed and I do this panel, we normally jump into the leads pretty quick.

Unknown Analyst

One last question in terms of the average practice, what are we talking about? What kind of a doctor, how many patients, how many...

Edward Y. Park

It mirrors -- it really mirrors the U.S. provider population. We have a ton -- we actually segment it into our business, into small, medium and enterprise groups, and so we have groups in size from -- so we have a lot of one-doc groups. We have a significant number of groups that have over 1,000 providers. We serve both retail clinics, urgent care chains across the board, large hospital networks. So anyone who has some sort of physician provider-based component we end up serving.

George Hill - Citigroup Inc, Research Division

Does anyone else have a question? I guess, I'll keep going. Getting to some of the critical questions, by our estimate, sales force productivity and how we measure this is new docs that come on divided by the number of reps that you have serving in each segment appears to have been trending lower, and you guys have been rapidly increasing the investment in SG&A. We know that the company has brought on a lot of new reps over the course of the past 12 to 14 months, takes reps a while to be productive. How should we think about sales force productivity going forward, and should we expect to see a return to historical rep productivity levels especially in the small and mid-sized practice side?

Edward Y. Park

I think that if you normalize per size, productivity has actually been relatively constant. With all that said, I mean, look, we basically -- the basic math of the model is that we spend anywhere from $0.50 to $0.60 per dollar recurring annualized revenue. If you do the math on that, then the gross margins are in the, call it, 60% range, right? So you've basically had a 1 year payback period. And after that, it's gravy forever. We'd be happy -- if I knew that we could spend twice as much today and get twice as much business, I would do it in a heartbeat, right? And so from our perspective, you're talking about pennies on the dollar from an outside margin perspective and the question is really what is the recurring revenue model over a long period of time? And we really want to get as much as we basically -- get as much business as we think we can service in a consistent and reliable fashion. So productivity isn't actually the key metric that we focus on. With that said, internally, we're hyper diligent about how we do things every year. Sales quota goes up for all of the reps across the board, et cetera, et cetera, but we invest a lot of marketing and sales in order to make sure that we bring those dollars on board.

George Hill - Citigroup Inc, Research Division

Athena, by nature of its valuation, many investors believe the company has built the better mousetrap for what it does especially around physician collections and rev cycle. To that end, we hear about -- we as investors hear about a lot of companies that want to come to market or come to market claiming to be web-based, SaaS-based, RCM, EMR companies. I guess, can you talk about what you see competitively out there with respect to companies that you feel like look like athena, and do you see anybody?

Edward Y. Park

There's folks around the edges, but honestly I haven't seen any -- I haven't really seen anybody that I'm really that concerned about. I mean, it's a huge market. We have 4% of the markets that we have, not counting other markets that we might go into at some point. And so I think that if other entrants want to come on board, I think the pie is plenty large enough, and frankly, I'd love to see more success in the health care overall for everybody involved. I think that it's relatively desolate in terms of the number of real standout successes. So I'd love to see more successes. In terms of other people who are trying to more or less copy us though, we haven't seen anyone who's actually been able to do it well because what we do is really -- and again, I don't want to go into nitty-gritty detail, but what we do is really, really, really hard and a really, really, really different from how you would go to business if you kind of force up a copy of our software and try to run yourself somewhere and hope that would all work. It's just night and day difference.

George Hill - Citigroup Inc, Research Division

Well, and I might even argue that, yes, part of what you do is very hard, and it would be very unattractive to a lot of people to go after that portion of the business to try to tackle the hard part.

Edward Y. Park

Yes, and the hard part is actually we do that -- what does Jonathan say about this? Is we basically do the work that doctors hate and suck at. And we try to do it better than they do. And it turns out that that's deeply unsexy, but we're happy to do it because it burns us a seat at the table.

George Hill - Citigroup Inc, Research Division

Okay, my last question is, we're kind of running low on time, pricing is always a topic of discussion in the RCM space outside of you guys and a couple of other technology vendors, still largely a mom-and-pop, outsourced, paper-based business, where pricing on a percent of collections can tend to come in meaningfully lower than what you guys charge. I guess, can you talk about what you see in the pricing environment and what you believe is Athena's ability to defend price going forward?

Edward Y. Park

In terms of the pricing environment, we actually see ability to maintain price. As you move into the enterprise space, I think that there are 2 things that are -- that play against each other in the enterprise space. So first of all, if you segment it out, our pricing in small and mid-sized continues to be terrific because the alternatives are all worse than we are. It's one of the advantages of basically having focused on an area of health care that doctors hate and suck and all other vendors consider to be unsexy, it's kind of like, well, we're the only people in that corner. And so we can actually deliver better results for a percent of that cost than everyone else in the space. In the enterprise segment, you have 2 kind of balancing forces. One is their ability to negotiate. The second bell is the fact that their scale actually does result in net lower operating costs for us. And so I think that when you analyze it on a margin perspective as opposed to a pricing perspective, you still find that we are able to maintain margin, and we remain hyper diligent about that basically that we maintain margins.

George Hill - Citigroup Inc, Research Division

Okay. We've run a minute or so over. Ed, as always very informative. So thank you very much.

Edward Y. Park

Terrific.

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